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Structural Change in Fiscal Policy and The Permanence of Fiscal Contractions - The Case of Denmark and Ireland

  • Hjelm, Göran

    (Department of Economics, Lund University)

  • Johansson, Martin W

    (Department of Economics, Lund University)

Registered author(s):

    Instead of relying on descriptive statistics to evaluate the permanence of a fiscal contraction, this paper suggests that this issue should be studied using tests for structural breaks in cointegrating relationships between taxes and spending. We label a fiscal contraction as 'permanent' if a structural break is detected during the contraction period. Applying Gregory and Hansen's (1996) test on Danish and Irish data and find that the fiscal contraction in Ireland (1987-1989) induced a structural change in fiscal policy while the results from the Danish data do not imply such a regime shift. We discuss possible explanations for this finding

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    File URL: http://project.nek.lu.se/publications/workpap/Papers/WP02_11.pdf
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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2002:11.

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    Length: 12 pages
    Date of creation: 21 Mar 2002
    Date of revision:
    Handle: RePEc:hhs:lunewp:2002_011
    Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
    Web page: http://www.nek.lu.se/en

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    1. Helmut Lütkepohl & Pentti Saikkonen & Carsten Trenkler, 2004. "Testing for the Cointegrating Rank of a VAR Process with Level Shift at Unknown Time," Econometrica, Econometric Society, vol. 72(2), pages 647-662, 03.
    2. Peter Reinhard Hansen, 2000. "Structural Breaks in the Cointegrated Vector Autoregressive Model," Econometric Society World Congress 2000 Contributed Papers 1240, Econometric Society.
    3. Rudiger Dornbusch, 1988. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc.
    4. Zaghini, A., 1999. "The Economic Policy of Fiscal Consolidations: The European Experience," Papers 355, Banca Italia - Servizio di Studi.
    5. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR;CES;MSH, vol. 13(27), pages 487-545, October.
    6. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
    7. Lambertini, Luisa & Tavares, Jose, 2002. "Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU," FEUNL Working Paper Series wp412, Universidade Nova de Lisboa, Faculdade de Economia.
    8. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
    9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    10. Bradley, John & Whelan, Karl, 1997. "The Irish expansionary fiscal contraction: A tale from one small European economy," Economic Modelling, Elsevier, vol. 14(2), pages 175-201, April.
    11. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
    12. U. Michael Bergman & Michael M. Hutchison, . "The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark," EPRU Working Paper Series 96-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    13. Seo, Byeongseon, 1998. "Tests For Structural Change In Cointegrated Systems," Econometric Theory, Cambridge University Press, vol. 14(02), pages 222-259, April.
    14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    15. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    16. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
    17. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
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